Things you need to know.
– Stocks rallied on some month end window dressing.
– Eco data begins to show real signs of retreat.
– The market is now convinced that rates have peaked.
– Dollar falls, Gold, Oil and the commodity complex rally
– Today is all about the PCE Deflator.
– Try the Chicken Provencial
Good morning, America! Good afternoon Europe and Good Night to Asia – Stocks continue to rally as the month draws to a close on what is certainly some month end window dressing and now the idea that rates have indeed peaked…As the bell rang – we saw the Dow up 38 pts or 0.1%, the S&P up 17 pts or 0.4%, the Nasdaq up 75 pts or 0.5%, the Russell ahead by 8 pts or 0.4% and the Transports up 75 pts or 0.5%.
Yesterday’s eco data on top of the weaker eco data earlier this week and this month – appears to be confirming that fact…..ADP Employment Change came in below the expectation at 177k jobs created (vs. 195k) – This on top of the weaker than expected JOLTS (Job Openings Labor Turnover Survey) report on Tuesday that showed a decline in job openings….leaving us with only 8,872k jobs available – down from the expected 9,500k and down from more than 11 million jobs available only months ago…Then toss in the weaker than expected revised 2nd qtr. GDP report that came in at 2.1% down from 2.4% and you have a recipe for weakness and weakness would suggest that the economy is slowing….which means that the FED is succeeding, ( the data is confirming a slowdown and remember – the FED is data dependent) which means that just maybe – they will pause here and then just hold rates at this level for that longer period of time that they have all suggested and that means that investors have clarity.
Clarity on what the FED will do….and that is all it wants…remember – investors and the markets can deal with (perceived) certainty (good or bad) vs. dealing with the unknown…never sure of what the next move will be… And it is that uncertainty that causes the chaos…. While perceived certainty allows investors to model it out and make more definitive projections.
So, for now, what the market is telling us is that it thinks rates have peaked right here at the 5.25%-5.5% range. In the end – it is ‘bad news IS good news for the markets’ type of reaction. The issue becomes what does the FED do when bad news is really bad news?
Confirming this are the reactions in the various other assets classes – bonds, the dollar, precious metals, and the whole commodity complex (which is dollar dependent) – …. Bonds gained – sending yields lower, Gold was up (sharply), Oil is up (but that is also a supply/demand story – see below) and the BCOM (Bloomberg Commodity Index) is also up…. all while the Dollar index is down….and that is another KEY metric to watch….
Now if investors think that the FED is done – then bond prices -which have been under pressure as rates rose should stabilize here as bond investors look for bargains – sending prices up and yields down as they did yesterday.
The 2 yr. is now yielding 4.88% down from 5.1% earlier this week…that’s a 4.3% drop, the 10 yr. is yielding 4.11% down from 4.35% on the 21st…and that is a 5.75% move lower…all while the shorter duration bonds – 3 & 6 month’s remain at the 5.45% and 5.5% range – because rates are not coming down in the near term…..which is why you don’t see a change in those rates. But what is yet to be known is what will happen to treasury yields in the months ahead when that slew of new bonds (to fund the out-of-control spending done by the Biden’s) hits the market…. when supply exceeds demand…. And when that happens – it will surely send bond prices lower and yields higher….and that will once again become a head wind for stocks…. but let’s not go there right now.
Gold which is another indicator of what investors think – shot higher on the latest data reads…this after being under pressure for the last 8 weeks as it remained convinced of higher rates…. and higher rates is good for the dollar and bad for precious metals…. – We discussed this….and Gold sold off by 5.5% – taking it from $2025 to $1915…Since that low, gold has rebounded (on the rate story) and this morning gold is trading at $1971!
The dollar – kept going higher as it too expected higher rates which is good for the dollar…. higher rates in the US will cause US and foreign investors to buy the dollar – which sends it higher…and guess what? That is exactly what we saw…the Dollar index shot up by 5% – we discussed this as well – until Monday…. when the eco data started to show weakness – and the rate hike story started to slow…this week – the dollar index is down 1.5% while gold is up 3.4%.
And then there are the public companies that are finding new ways to eliminate jobs…without ‘firing’ you…. they just reassign you….
Earlier this week – the WSJ ran an article titled.
“You’ve Heard of Quiet Quitting, Now Companies are Quiet Cutting – layoffs are down, but employers are still finding ways to cut jobs.
The article goes onto say how companies are finding ways of cutting overhead expense and ‘reassigning’ employees – in fact, the article goes onto say that reassignment mentions during the reporting season tripled y/y. And so, you say – ‘Ok – what’s the issue? I still have a job’ to which the implication is – Mmmm, not so much….you see, when the company wants to ‘trim’ jobs and they reassign you to a job that you do not want – what they are betting is that you will quit and move on…relieving them of having to pay you a severance package…while also cutting their overhead expense…..Capisce?
In any event – maybe the data is shifting…. maybe all of these hikes are finally kicking in…. maybe JJ has navigated his way out of the mess he helped create…. but that does not mean it will be a soft landing…. It just means it will be a landing…. soft or hard has not been determined yet…. that will depend on how fast the cracks appear (data shifts) …. what starts out as a hairline crack can quickly become a structural crack….and that will be the next issue….
Today’s eco data is all about the FED’s favored inflation gauge…the PCE Deflator and it is expected to tick up (ever so slightly) going from 3% y/y to 3.3% while the Core Deflator is expected to go from 4.1% y/y to 4.2%. Investors know this….if it comes in at these levels then I don’t think we see much of a reaction….but if they come in a bit hotter – then it will ignite the rate hike story all over again…and if it comes in a bit weaker – then expect the pause story to gain more steam… In addition – we will get Personal Income and Spending for the month of July with income begin flat while spending is expected to go up to +0.7% from +0.5%…. think higher prices is causing higher spending for the basics…. food, energy, housing, utilities………nothing more…
Tomorrow will bring the August NFP report….and that is expected to show a gain of 170k jobs…. The unemployment rate is expected to remain at 3.5%, Average Hourly earnings m/m up 0.3% while earnings y/y are expected to be up 4.3%. These are strong numbers and, in my opinion, will lead the street to realize that JJ may not be done raising rates all while others suggest that the numbers will not be definitive enough allowing the FED to do nothing. Fed Fund Futures are now suggesting only an 11% chance of an increase in September…down from 32% earlier this week….and that makes sense vis a vis the latest eco data. while the November chances fell to 37%, down from 45% – and that is what is driving the latest move up.
Oil rallied yesterday on a weaker dollar and after the EIA reported that US crude inventories fell by 10.6-million-barrel last week, vs the expected drop of 3.3 million…. Suggesting that demand is fine….In addition after the coup in Gabon – the military seized control of the country and the oil fields and that could cause supplies to tighten along with the expectation that the Saudi’s will continue their production cuts thru October…all issues that will push prices up, but then don’t forget how they will talk about how slow the Chinese recovery is slowing and that will dampen demand…in any event – oil is trading up 15 cts at $81.80/barrel….leaving us in the $80/$85 trading range.
And going into the final trading day of the month….US futures are UP again…. Dow futures +115 pts, S&P’s up 5, the Nasdaq up 10 and the Russell is ahead by 3 pts. News that Atlanta FED President Raffi Bostic thinks that rates are high enough only fueling the move higher…In addition – Salesforce announced 2nd qtr. results after the bell last night and they ‘exceeded’ analysts’ expectations…sending that stock up 5% in the pre-mkt and that is helping the Dow futures. The surge this week has essentially taken back most of it not all of the losses suffered in the early part of August…as of today – the Dow and S&P are only down 1% mtd, while Nasdaq is off by 2.5% mtd – but that is up from being down nearly 9% earlier this month.
European markets are also rallying into month end……. markets across the zone are up between 0.2% and 0.6%, as the ‘global rally’ continues….and traders and algo’s try to take back the August losses…. Expect investors in Europe to pay attention to today’s PCE inflation data. In addition – UBS just reported its ‘biggest ever’ quarterly profits – rising 7% and this is after the emergency takeover of Credit Suisse earlier this year.
The S&P ended the day at 4514 up 17 pts….and it looks like we could end the day on a positive note taking the month to near flat performance vs. the way it started out. We are closing out the month with inflation and economic data points top of mind….and those data points are suggesting that the economy is weakening….but we are also in a big vacation month – resulting in lower volumes and a seasonally weak time of year – which is famous for exaggerated moves….….September is also a seasonally weak month…in fact it is the worst performer on a historical basis – so before you go betting the ranch – sit back and let it settle in….The next FOMC meeting is 3 weeks away and there will be plenty of eco data between now and then. Further weakening of the data will support the pause argument…but mixed to stronger data will remind us that maybe the FED is not finished.
In any event – we busted up and thru 4460 – a level that I thought would provide some resistance….and now is short term support – which does put the July high of 4605 in play….something that I still think isn’t happening….(right now)….which is what is keeping me patient….which doesn’t mean I am not putting money to work – it just means I am being patient and opportunistic.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.
Chicken Provencal
This is a great dish and one that you can use for a large gathering.
For this you need: Legs and thighs (on the bone), celery, carrots, onions, garlic, potatoes, olive oil, butter, s&p, crushed tomatoes & white wine.
Pre-heat oven to 325 degrees
Begin by heating up some olive oil and a qtr. stick of butter in a large frying pan. While that is happening – place the chopped celery, carrots, onions, and crushed garlic in the bottom of a deep baking dish. Now season the chicken pieces and fry them until they are golden brown all over. Now place in the baking dish on top of the veggies. When you have fried all the chicken – add a dollop more of butter and deglaze the pan with white wine – I used Pinot Grigio. Bring to a boil and allow the alcohol to burn off – now add the crushed tomatoes– season with s&p and heat up. Pour this over the chicken pieces and cover tightly – do not drown – just leave it bathing in the tomato sauce. Place in the oven at 325 degrees and let bake for 1 hr…..
Now peel the potatoes – cut in half and then slice into bite size half-moons. Add the chicken – let it bake for another hour.
Now – turn the heat up to 375 and remove the foil – let it continue to bake in the oven for another 20 mins…. Then turn the pieces of chicken over and let cook for another 20 mins. You want the chicken pieces to brown up nicely.
When complete – remove and serve with wild rice or rice pilaf and a large green salad. – Delish.
Buon Appetito
